What To Do Now In The Aftermath Of Tariffs – Wall Street Caught On The Wrong Side

To gain an edge, this is what you need to know today.

What To Do Now

Please click here for an enlarged chart of SPDR S&P 500 ETF Trust (SPY) which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

• The chart shows that in the early trade the stock market is below the micro resistance zone in the aftermath of the tariffs.
• The chart shows the stock market is still significantly above the 200 day moving average.  The 200 day moving average coincides with the support zone shown on the chart.
• Stock futures have improved from where they were trading on Sunday evening.
• President Trump's executive orders on tariffs were issued on Friday.
• Going into Friday, Wall Street did not believe that Trump would actually impose tariffs, even though Trump had been very clearly saying for the last week that tariffs would go into effect on February 1.  The consensus on Wall Street was that it was simply a negotiating tactic.
• On Friday, when Trump issued an executive order imposing tariffs, at first, Wall Street was taken aback with surprise.  Then, a story was promoted that Trump was about to rescind the tariffs.  The story received so much publicity that the White House was forced to specifically state that the story was wrong.
• After the White House denied the story, the stock market started falling.  Momo gurus were able to arrest the fall by claiming it was going to be just like the tariffs Trump imposed on Columbia.  The Arora Report previously shared with readers that the tariffs on Columbia were lifted very quickly.
• Wall Street was in shock when the tariffs were still in place on Sunday evening.  This led to a big drop in stock futures.
• In The Arora Report analysis, investors need to pay attention to the details in the executive order.  The executive order appears to be focused on drug flow into the U.S.
  • Our latest information is that Mexico is open to cooperating with the U.S. on drugs.  It is conceivable that Trump and Mexico can reach an agreement related to drugs fairly quickly, which would likely result in the tariffs on Mexico being lifted.
  • Our latest information is that Canada is resisting full cooperation with the U.S. on drugs.  The reason is that a wave of economic patriotism is sweeping Canada.  Canadian politicians are mischaracterizing Trump's executive order as a trade war.
• Here are the other long term objectives Trump has from the tariffs:
  • Reduce the trade deficit.
  • Bring manufacturing to the U.S.
  • Bring foreign capital to the U.S.
  • Use money from tariffs to pay for income tax cuts.
• Here are the two main questions that will determine the course of the tariffs, and in turn, the course of the stock market.
  • Will Trump stick with the executive order, or will he start mingling longer term objectives with the current executive orders?
  • Will Canada and Mexico cooperate, or will they retaliate?
• In The Arora Report analysis, on the positive side, tariffs on China are less than expected.
• In The Arora Report analysis, the situation is very fluid, and the best course of action is to keep a close eye on which way it goes.
• At The Arora Report, we have been helping you look ahead.  Our call was to take profits ahead of Trump's inauguration.  The Arora Report repeated several times that once reality met hopium, the situation would change.  In contrast, Wall Street largely did not take profits and clung to hopium.
• Cash levels are low.
  • A vast majority of money managers are at the lowest cash level in years.
  • The momo crowd has invested more than 100% by taking margin.
• In contrast to the momo crowd and Wall Street, the protection band from The Arora Report looked ahead and took into account the volatility that was going to come when Trump started implementing his agenda.  As such, there is no change in the protection band.  However, investors need to stay alert – changes will be made to the protection band as new data comes in.  
• To help investors think, if Trump had rescinded tariffs over the weekend, the stock market would have been up over 1000 DJIA points this morning.  As a reference, DJIA futures are down 638 as of this writing in the premarket because Wall Street got it wrong.
• Both Wall Street and the momo crowd have great reasons to be concerned because they are prepared for only one scenario – the stock market going straight up to S&P 500 levels of 6500 – 7000.   
• Expect blind money to flow into the stock market today and tomorrow.  Blind money is the money that flows into the stock market on the first two days of the month without any analysis irrespective of market conditions.

Magnificent Seven Money Flows

In the early trade, money flows are negative in Apple Inc (AAPL), Amazon.com, Inc. (AMZN), Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), Microsoft Corp (MSFT), NVIDIA Corp (NVDA), and Tesla Inc (TSLA).

In the early trade, money flows are negative in S&P 500 ETF (SPY) and Invesco QQQ Trust Series 1 (QQQ).

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust (GLD).  The most popular ETF for silver is iShares Silver Trust (SLV).  The most popular ETF for oil is United States Oil ETF (USO).

Bitcoin

Bitcoin BTC/USD is seeing selling.  Those who are still under the illusion that bitcoin is a hedge are disappointed.  The price action in bitcoin once again shows The Arora Report's consistent call is spot on that bitcoin is not a hedge, but instead a speculative asset that is manipulated higher during risk-on periods.  

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  The proprietary protection band from The Arora Report is very popular.  The protection band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider a protection band consisting of cash or Treasury bills or short-term tactical trades as well as short to medium term hedges and short term hedges. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

A protection band of 0% would be very bullish and would indicate full investment with 0% in cash.  A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less.  Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

The Arora Report is known for its accurate calls. The Arora Report correctly called the big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.